All Leases are Capital Leases

As most of the nonprofit community is aware, big changes are no in effect for financial statement presentation.  We no longer have to report Temporarily Restricted funds and the wacky entries for relief of restriction.  There are other changes in FASB 2016-14.  But have you heard of Topic 842, part of 2016-02?  This new guidance states that all leases of longer than one year have to be reported as an asset and liability as well as have impact in the Statement of Cash Flows.  Here’s a quick summary:

For finance leases, a lessee is required to do the following:

1. Recognize a right-of-use asset and a lease liability, initially measured at
   the present value of the lease payments, in the statement of financial
   position
2. Recognize interest on the lease liability separately from amortization of
   the right-of-use asset in the statement of comprehensive income
3. Classify repayments of the principal portion of the lease liability within
   financing activities and payments of interest on the lease liability and
   variable lease payments within operating activities in the statement of
   cash flows.

For operating leases, a lessee is required to do the following:

1. Recognize a right-of-use asset and a lease liability, initially measured at
   the present value of the lease payments, in the statement of financial
   position
2. Recognize a single lease cost, calculated so that the cost of the lease is
   allocated over the lease term on a generally straight-line basis
3. Classify all cash payments within operating activities in the statement of
   cash flows.

Be aware of this new reporting requirements, I’m sure your auditors will be bringing it up.  Be prepared for this is required reporting for fiscal years beginning after December 15, 2019, unless you issue bonds, in which case the reporting requirement begins after December 15,2018.  For most of our clients, you’ve got a year to prepare.  We’ve found a few commercial programs that compute and report the necessary present value and amortization amounts needed but we’ve found them to be fairly expensive.  We’re looking into alternatives and will post additional information as we find it.

Please give us a call if you have questions on this new requirement, we’re happy to help as we can.